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Capital Gains Reserve - All Other Properties Except Donated Non-Qualifying Securities

Income Tax Act s. 40(1)(a)(iii)

Deferral of Capital Gains Using Capital Gains Reserve

Example of Capital Gains Reserve With Equal Payments Over Five Years

Claiming Less Than Maximum Capital Gains Reserve

Larger Down Payment Changes Capital Gains Reserve

TaxTips.ca Resources

Canada Revenue Agency (CRA) Resources

Tax Tip

Deferral of Capital Gains Using Capital Gains Reserve

This reserve is available for the deferral of capital gain on disposals of property when the proceeds are received over a number of years. This article deals with the reserve that is available for most capital property, except for dispositions which are:

- Dispositions to your child of family farm property, family fishing property after May 1, 2006, and small business corporation shares, and

- Gifts of non-qualifying securities (other than an excepted gift) to a qualified donee

The reserve is calculated using the following formula:

capital gain x amount payable after the end of the year
total proceeds of disposition

The reserve can be claimed up to a maximum of four years, which spreads out the capital gain over 5 years. There is a maximum reserve that can be claimed in each year. The maximum is calculated as a percentage of the capital gain. The maximum percentage is:

Year of sale	80%
Years after the sale:
1st year	60%
2nd year	40%
3rd year	20%
4th year	0%

Therefore, to spread out the gain over the maximum 5 years, you would have to receive your proceeds of disposition over at least 5 years.

It is not necessary to claim the maximum allowed reserve in any year. However, if a reduced reserve is claimed in a year, the reserve claimed in the following year cannot exceed that amount. For instance, if in the year of sale 45% of the capital gain was claimed as a reserve, then the maximum reserve that could be claimed in the next year would also be 45%. If the 45% maximum was claimed in the next year, the capital gain would be zero, because amount of capital gain in each year is equal to the reduction in the amount of the reserve from the previous year. If a higher reserve could be claimed in a subsequent year, the result would be the creation of a loss. This is not allowed.

A person may not have to claim the maximum reserve in a particular year if they have capital losses to offset the capital gain, or if they have business losses to reduce taxable income. They might also want to shift income to the current year from the coming year, if they know that they will have higher income in the coming year.

Example of Capital Gains Reserve With Equal Payments Over Five Years

Example - sale of real estate which has been used as a rental property:

Proceeds of disposition (P)	$2,400,000
Less cost	600,000
Capital gain (G)	$1,800,000

The proceeds are being received over a period of 5 years. A $480,000 down payment is made, with annual payments of $480,000 for the next 4 years. The reserve is calculated as follows, with the original capital gain amount of $1,800,000 referred to as G (gain) in the formulas shown in the table below. Assume that the settlement date of the sale was March 31, 2024.

	Capital Gain Before Reserve A	Amount Payable After Yearend B	Reserve = G x B / P C	Maximum Reserve % D	Maximum Allowed Reserve E = G x D	Capital Gain Incl. in Income H = A - E	Inclusion Rate⁽¹⁾ I	Taxable Capital Gain I x H
Year of sale 2024	$1,800,000	2,400,000 - 480,000 = 1,920,000	1,800,000 x 1,920,000 2,400,000 = $1,440,000	80%	$1,440,000	$360,000	50%	$180,000
Years after sale:
1st year 2025	1,440,000	1,920,000 - 480,000 = 1,440,000	1,800,000 x 1,440,000 2,400,000 = 1,080,000	60%	1,080,000	360,000	55.093%	198,335
2nd year 2026	1,080,000	1,440,000 - 480,000 = 960,000	1,800,000 x 960,000 2,400,000 = 720,000	40%	720,000	360,000	55.093%	198,335
3rd year 2027	720,000	960,000 - 480,000 = 480,000	1,800,000 x 480,000 2,400,000 = 360,000	20%	360,000	360,000	55.093%	198,335
4th year 2028	360,000	480,000 - 480,000 = 0	1,800,000 x 0 2,400,000 = 0	0%	0	360,000	55.093%	198,335
Total Capital / Average Inclusion Rate / Taxable Capital Gain						$1,800,000	54.07%	$973,333

(1) 50% is the inclusion rate for capital gains and losses for 2001 to June 24, 2024. For capital gains after June 24, 2024, the inclusion rate is 50% for the first $250,000 for individuals, and 66 2/3% for gains in excess of $250,000. Thus, an average inclusion rate is shown for 2026 to 2028 above.

The 55.093% inclusion rate is calculated as:

[($250,000 x 50%) + ($360,000-$250,000)*66 2/3%] /$360,000 = 55.093%

If the sale had taken place in 2023, with the reserve of $1,440,000 at the beginning of 2024, the 2024 capital gain inclusion rate would have been 50%, as the reserve is deemed to be taken into income at the beginning of the year.

In the above example, the proceeds are received evenly over the 5 years, so the initial reserve calculation equals the maximum allowable reserve. Note that the capital gain before reserve in the years after the sale is always the amount of the reserve claimed in the previous year. If no reserve was claimed in any year, then the reserve amount from the previous year would be brought into income as a capital gain. The amount of capital gain in each year after the year of sale is equal to the reduction in the amount of the reserve from the previous year.

Claiming Less Than Maximum Capital Gains Reserve

In the above example, if the taxpayer decided in the year of sale to claim a reserve of only $1,000,000, then the capital gain after the reserve would be $800,000 ($1,800,000 - $1,000,000). They might decide to do this if they had capital losses to offset the capital gain, or if they had business losses that would reduce their taxable income. The maximum allowable reserve in the 1st year after sale would then be $1,000,000, the same as the year of sale. If this amount is used it would result in a zero capital gain for the year, because there is no reduction in the reserve amount from the prior year. See the following for an example, with the capital gain of $1,800,000 again referred to as G in the formulas shown.

	Capital Gain Before Reserve A	Amount Payable After Yearend B	Reserve = G x B / P C	Maximum Reserve % D	Maximum Allowed Reserve E*	Reserve Claimed F	Capital Gain Incl. in Income H = A - F	Average Inclusion Rate⁽¹⁾ I	Taxable Capital Gain = H x I
Year of sale 2024	$1,800,000	2,400,000 - 480,000 = 1,920,000	1,800,000 x 1,920,000 2,400,000 = $1,440,000	80%	$1,440,000	$1,000,000	$800,000	50%	$400,000
Years after sale:
1st year 2025	1,000,000	1,920,000 - 480,000 = 1,440,000	1,800,000 x 1,440,000 2,400,000 = 1,080,000	60%	1,000,000	1,000,000	nil	n/a	nil
2nd year 2026	1,000,000	1,440,000 - 480,000 = 960,000	1,800,000 x 960,000 2,400,000 = 720,000	40%	720,000	720,000	280,000	51.786%	145,001
3rd year 2027	720,000	960,000 - 480,000 = 480,000	1,800,000 x 480,000 2,400,000 = 360,000	20%	360,000	360,000	360,000	55.093%	198,335
4th year 2028	360,000	480,000 - 480,000 = 0	1,800,000 x 0 2,400,000 = 0	0%	0	0	360,000	55.093%	198,335
Total Capital / Average Inclusion Rate / Taxable Capital Gain							$1,800,000	52.31%	$941,667

* The maximum allowable reserve is the lesser of G x D, or the reserve amount from the previous year.

Larger Down Payment Changes Capital Gains Reserve

The next example shows what happens with the reserve when a larger down payment is received. The proceeds and cost are the same as the above example, with a capital gain of $1,800,000 (again referred to as G in the formulas shown). However, $700,000 is received in the first year, with annual payments of $425,000 for the next 4 years. The reserve is calculated as follows:

	Capital Gain Before Reserve A	Amount Payable After Yearend B	Reserve = G x B / P C	Maximum Reserve % D	Maximum Allowed Reserve = G x D E	Actual Reserve = Lesser of C and E F	Capital Gain Incl. in Income H = A - F	Taxable Capital Gain = H x Incl Rate
Year of sale 2024	$1,800,000	2,400,000 - 700,000 = 1,700,000	1,800,000 x 1,700,000 2,400,000 = 1,275,000	80%	$1,440,000	$1,275,000	$525,000	$262,500
Years after sale:
1st year 2025	1,275,000	1,700,000 -425,000 = 1,275,000	1,800,000 x 1,275,000 2,400,000 = 956,250	60%	1,000,000	956,250	318,750	170,833
2nd year 2026	956,250	1,275,000 - 425,000 = 850,000	1,800,000 x 850,000 2,400,000 = 637,500	40%	720,000	637,500	318,750	170,833
3rd year 2027	637,500	850,000 425,000 = 425,000	1,800,000 x 425,000 2,400,000 = 318,750	20%	360,000	318,750	318,750	170,833
4th year 2028	318,750	425,000 - 425,000 = 0	1,800,000 x 0 2,400,000 = 0	0%	0	0	318,750	170,833
Total Capital / Average Inclusion Rate / Taxable Capital Gain							$1,800,000	$945,833

The average inclusion rate is $945,833 / $1,800,000 = 52.55%.

[($250,000 x 50%) + ($318,750-$250,000)*66 2/3%] /$318,750 = 53.595%

TaxTips.ca Resources

Capital Gains and Losses

Capital Gains Reserve

Lifetime Capital Gains Exemption (LCGE)

Canada Revenue Agency Resources

Claiming a capital gains reserve

T4037 Capital Gains - Claiming a Reserve

Tax Tip: If you are selling capital property, it may be advantageous to carry the mortgage, and spread your gains over 5 years. Get professional advice on this.

Revised: September 20, 2024